When you transfer money from one bank to another, are they just moving virtual bits around? Is anything backing those transfers? What prevents banks from just fudging the bits and “creating” money?


When you transfer money from one bank to another, are they just moving virtual bits around? Is anything backing those transfers? What prevents banks from just fudging the bits and “creating” money?

In: 1559

Banks are actually allowed to just create money. That’s how the money system works. Banks need only a certain amount of actual hard, physical money in their vaults and they can then lend out a certain amount more than that. In a lot of countries a bank only has to have 10% of its money in physical form compared to its loans. The rest is just numbers in a spreadsheet. This is known as Fractional Reserve Banking.

However, in response to your question in a more narrow way, what would a bank get by giving you extra money in your account? This could happen by accident, and I’m sure it has, but there’s going to be a trail. Money doesn’t just get created from nothing (yes, even going by the first paragraph here it’s created in a loan with a fraction of that loan existing as physical money in a vault). Banks have to report their money to the taxman, government, etc.

I would assume these banks collect proof of transaction and settle them by a certain date every year or such

Most banks are settled under a central bank, bank 1 and bank 2 settle transactions under the faith of central bank. They probably don’t actually transfer cash because of the system continuity.

When you transfer money between banks the two banks will both keep track of how much they owe each other bank and how much they are owed. There are various systems that the banks have implemented to clear out these debts over time. But at some point it may be necisary to transfer funds between banks. Most legislation still require the banks to settle their debts with gold but this is like paying for your house with cash, both parties hate it. So the banks will often settle their debts with government bonds instead as it is much easier to transfer then gold.

When you transfer money from one bank to another, the bank actually transfers money from their own account at the central bank to the account of the bank that holds the account you’re sending money to. So they would need to have sufficient balance to cover these transfers.

For example, bank A and bank B both have an account at the Federal Reserve. Your account is at bank A, your friend’s is at bank B, and you want to wire $1k to your friend. So you tell bank A to wire the $1k to your friend’s account at bank B. Bank A checks that your account has the money and deducts it, then forwards the request to the Federal Reserve. The Federal Reserve checks that bank A’s account has sufficient money, and transfers $1k from bank A’s account to bank B’s account, with a note of your friend’s account number. Bank B receives this deposit, and credits your friend’s account per the note on the transaction.

Your bank account isn’t just a number that says “Zemvos has 5$”.
It’s a record of all incoming and outgoing transactions, to get the balance you just add them all up.
For every transaction there has to be an equal and opposite transaction in the other persons account.
I.e. if your account has an entry “received 1$ from Jim”, Jims account will have an entry “send 1$ to Zemvos”.
Now a bank could ofcourse just add an unmatched transaction to an account. But (at least in theory) they get audited regularly and the unmatched transaction will be found and the bank punished.

Banks have balance sheets which are scrutinized heavily both internally, externally (third party auditors), and their regulating bodies.

You can likely fudge it but someone will chase you down because you can’t make up money from thin air despite what others are mentioning.

The key concept to start this off with is that we all owe money to and are owed money by everyone else when we buy or sell a service or good. Banks are the clearing houses for us. We use banks because we all accept their promise to pay. When you transfer money the bank debits your account (you have less credit on account with the bank) and they credit the person you are transferring to an equal amount.
If this transfer is between banks they will settle in real time on an aggregate basis eg Bank A owes Bank B $50, Bank B owes Bank A $60 so in total Bank B owes Bank A $10. That “money” is a credit issued to Bank A as a note endorsed by the other bank (there is interest on this). This note is an asset for Bank A which can use it as money to fund lending or settle debts.
Note the concept is similar in most countries. Most central banks have done away with the need for banks to maintain balances with them.
The concept of cash is that it the paper notes or “money” are good for credit with the government which everyone and every business accepts as payment.

The bank is just the middleman but tis the fed that controls the money.

And yeah they can create as much as they want with 0% collateral, in fact

1 out of every 3 dollar was created since 2020

Imagine the worse part of fudging the bits and creating money. And realize you’re no where even remotely close to how bad it actually is. They do all of that and still end up bankrupt and asking the federal reserve for more printed money.

When you buy bitcoins, the first transfer was from real cash to bitcoins, but let’s say you then only invest in stuff and gain interest with bitcoins, then that is all digital.

Bitcoin is specifically designed so you can’t hack the system, and there’s technically nothing banning banks from using a similar system as a backbone for monitoring currency flows.

But in the end you always have the possibility to exchange bitcoins for real cash, as long as you find someone interested in buying your bitcoins.

On the creating money part banks in a roundabout way sort of do create money in the credit system. To simplify, banks make money by loaning out your money. When person A deposits money in the bank lets say £100, the bank will not make money if that money isn’t loaned out to someone else. So they loan it out to person B but what if Person A came back and wanted their money back? The bank obviously can’t give it back to them because Person B has it, so what the bank will do, is assume Person A will only ever come back for £10 at any time. This is good because the bank has £90 to give out to person B.

At this point, there is £190, the £100 that Person A is entitled to and £90 person B has in hand.

But what if Person B puts that £90 back into the bank. The bank will repeat the process keeping £9 and lending out £81 to person C. Now there is £271 even though there is only £100 of cash put in (£100 for Person A, £90 for Person B and £81 for person C).

If this process keeps going, with the bank assuming that every person will only ever come back for 10% of their money. The original £100 given to the bank by Person A turns into £1000 throughout alot of people even though no new money is deposited.

Banks have to be audited externally by internationally recognized auditing firms like KPMG, so every month or so, each bank has to submit the audit reports to the central bank to check.

It’s impossible to create more money at the destination from the source, because banks use double-entry banking systems (such as Oracle FLEXCUBE and Temenos) that make absolutely sure that the credit and debit amounts are exactly equal. This kind of banking system runs data integrity check every night to make sure that everything are perfectly balanced.

Transferring money between banks usually goes through the central bank’s clearing house. This means the banks have deposit reserves held at the central bank. Basically, the central bank is a bank for banks. Each bank has banking accounts at the central bank, so money transfers are moving from one account to another.

Source: Banking IT expert here.

And technically they can just create it, but it gets corrected, unless it’s called Quantitative Easening. Bankese for “making money”

My account was credited $1100 when it should have only been $110 from a check j cashed. This was corrected within 48 hours but for that small time, it was in my account.

You asked three questions.

Yes, they are just moving virtual bits around between accounts.

No, there is nothing specifically backing those transfers. They’re just moving numbers around in software.

The explicit job of a bank is to create money. The Federal Reserve requires member banks (basically all banks in the US) to maintain a minimum of 10% of deposits with the Fed. So that means that as long as the total amount of the loans a bank originates does not exceed 10 times their total deposits, they can essentially create new money through loans without having to have someone deposit the equivalent amount of money first.

Been doing wire and ach/direct deposits for years now. If you have two banks that aren’t affiliated with each other, the originating deposit goes to the US Treasury for verification before it goes to the end bank. Thats why you can’t “fudge” anything.

I actually know this one! Caveat: My background is in European (SEPA) Banking. While I believe the fundamentals will be similar everywhere, I can’t promise it works exactly that way everywhere (eg in the US).

When money is sent from your account, the sending bank writes it on a long list of all transfers they do in this sending window. When the sending time comes, they send the list to the clearing bank, who then takes all the rows to Bank X from all the files it received, puts it into a single list and sends it to Bank X for crediting to their customers. This is the clearing (=exchange of information) part.

Next comes settling. The clearing bank looks at all the transfers made from Bank X to Bank Y and from Bank Y to Bank X and nets them. So Bank X sent 100m to Bank Y and Bank Y sent 30m to Bank X? Then Bank X actually sends 70m to Bank Y.

This reminds me – one of my friend’s parent is a MAGA nut job talking about having all of their cash converted into gold “when US goes digital like China.” I asked if he realizes when he uses an atm or debit card at a gas station there is not a little cubby-hole filled with his money and a little guy running back and forth taking his dollars and moving it to the cubbyhole filled with the gas station’s money.

This probably shows my age, but when I was in high school the accounting teacher said “someday all banking will be is computers transferring numbers back and forth.” Barring the currency backing up the numbers, this is basically how we live today.

Nothing. Literally nothing. You just explained banks. They are giving you virtual money that they promise to provide when challenged.

However they don’t have all the cash on hand to supply all their “so called money”

Quite simply, they make money out of nothing. That’s it. They just promise that it’s good!

Fun fact the federal reserve does the same thing with gold now that we don’t have a gold standard

The South Park episode [Pinewood Derby](https://www.imdb.com/title/tt1397944/) is probably the simplest way anyone has ever been able to explain how money is simply a concept that we all just agree has value.

Money used to be a representation of gold and the mint had enough gold to back all of it. That didn’t last long.